Perspectives on China: Chinese Investments in ‘Strategic Sectors’

October 6, 2016

It looked like a done deal. State Grid Corporation of China was willing to pay €830 million for a 14 percent minority stake in the power and gas distribution system operator Eandis which distributes gas and electricity to about 80 percent of people in Flanders (Belgium).1

Following a 1.5 year process, the State Grid deal was ready to be voted on (and likely to be approved) during the October 3 Eandis member meeting.

Surprisingly, one week before the vote, a memo from the national State Security Agency cautioned against the deal because of links between State Grid and the Communist Party. The State Security Agency warned that by allowing China to buy into the power grid, customer details could be handed over to the Communist Party and state intelligence agencies. In addition, it signaled the risk that Belgian technology could be used by the Chinese military.

The State Security Agency concluded: ‘The electricity grid is considered to be a strategic sector. Because of the close ties between State Grid and the Chinese authorities and the Communist Party extreme caution with regard to an investment in a strategic sector is called for’ (Eeckhaut, 2016).

State Grid’s failed bid for a 14 percent stake in Eandis follows on the heels of Australia’s decision to block State Grid from buying a 50.4 percent stake in Ausgrid.2

Strategic Sector Investment: Focus on China

Chinese investments in strategic sectors are increasingly being scrutinized. To illustrate, on September 15, sixteen members from Congress in the U.S. urged for a review of the Committee on Foreign Investment in the United States (CFIUS) ‘… to determine whether its statutory and administrative authority have effectively kept pace with the growing scope of foreign acquisitions in strategically important sectors in the U.S.’. (Wong, 2016,Congress of the United States, 2016). In their letter, the members of Congress are very much focusing on Chinese investments in the U.S.

‘Several recent examples of concerns involve the telecommunications, media and agriculture sector, which raise questions of the degree to which foreign ownership – especially from Chinese companies designated as ‘state champions’ that often benefit from illegal subsidies designed to gain strategic access to markets like the U.S. – may pose a strategic rather than overt national security threat’ (Congress of the United States, 2016).

As more and more Chinese firms are ‘going out’, many of them are running into national security concerns. Consider, for example, Tsinghua Unisplendour Corp. of China withdrawing its bid for hard disk drive maker Western Digital or the protest surrounding Chongqing Casin Enterprise Group’s planned acquisition of the Chicago Stock Exchange.

Media and Entertainment: A Strategic Sector?

Most recently, Dalian Wanda found itself in the eye of the storm following the announcement of an alliance with Sony Pictures Entertainment. The partnership in which Dalian Wanda will help promote Sony films in China and co-finance some of Sony’s biggest China movie releases comes on the heels of two major acquisitions. In January 2016, the company announced the acquisition of Legendary Entertainment (the company behind blockbusters such as ‘Jurassic World’). In March 2016, AMC Entertainment – the U.S. cinema chain previously [2012] acquired by Dalian Wanda – made a bid for Carmike Cinemas which would make the Dalian Wanda Group the owner of the biggest cinema chain in the United States.

‘Wanda will strive to highlight the Chinese element in the films in which it invests’ the company said (Ma & Schwartzel, 2016). Earlier this year, Wang Jianlin – the founder/owner of Dalian Wanda – said that he would like to ‘change the world where rules are set by foreigners’ (Swanson, 2016). Not surprisingly then, concerns have been voiced that deals like this could lead to more pro-Chinese propaganda in U.S. films. Plenty of evidence already exists that Hollywood studios have altered films to feature China or the Chinese government in a more flattering manner in order to gain access to China’s large and lucrative film market.

Wang’s statements about increasing China’s influence also seem to be perfectly aligned with China’s president Xi Jinping desire to increase China’s ‘soft power’.3 In an article in the state newspaper People’s Daily, Xi called for a promotion of China’s soft cultural power by disseminating modern Chinese values.

‘China should be portrayed as a civilized country featuring rich history, ethnic unity and cultural diversity, and as an oriental power with good government, developed economy, cultural prosperity, national unity and beautiful mountains and rivers. China should also be marked as a responsible country that advocates peaceful and common development, safeguards international justice, and makes contributions to humanity, and as a socialist country which is open, amicable, promising and vibrant,’ Xi said (People’s Daily, 2016)

In order to strengthen China’s soft power, Xi urged the country to build its capacity in international communication, construct a communication system, make better use of new media and increase the creativity, appeal and credibility of China’s publicity. From a political standpoint then, the global expansion of Dalian Wang seems to be very much in line with Beijing’s stated goal to increase China’s soft power. Not surprisingly, policy makers in the U.S. are interpreting the Sony-Dalian Wang deal as yet another move by China to increase its influence abroad.

Given the increased quantity as well as increased sector diversity, we seem to be entering a new phase of Chinese overseas investments. Western nations will need to consider how far they can and will allow Chinese firms to go given that the playing field is seen by many as anything but even.

1 Interestingly, the bid by State Grid was substantially higher than that of the other two bidders: APG (a Dutch Pension Fund) and AustralianSuper/IFM (Australian pension fund/infrastructure company). The State Grid offer involved a ‘commercial premium’ of 71 % over the net-asset value of Eandis.

2 In August (2016), State Grid Corp. of China and Cheung Kong Infrastructure Holdings (CKI) were blocked from buying a 50.4 percent stake in electricity distribution firm Ausgrid (a New South Wales state-owned enterprise) on a 99-year lease contract. Ausgrid supplies energy to more than 1.6 million homes and businesses in New South Wales (Williams, 2016). Said Australia’s treasurer Scott Morrison: “After due consideration of responses from bidders to my preliminary view of August 11, 2016, I have decided that the acquisition by foreign investors under the current proposed structure of the lease of 50.4 per cent of Ausgrid, the New South Wales electricity distribution network, would be contrary to the national interest.” (South China Morning Post, 2016)

3 The concept of ‘soft power’ was developed by Joseph Nye of Harvard University. Soft power refers to a nation’s ability to shape the preference of others through appeal and attraction. It is – in contrast to ‘hard power’- non-coercive. A nation’s culture and values are seen as major levers to create soft power.

IMM Global Executive MBA

Filip Caeldries is Academic Director of the IMM – Global Executive MBA program where he teaches the Strategic Management and Geo-Competitive Perspectives courses.The IMM –Global Executive MBA program is a partnership program with TIAS School for Business and Society (NL), Purdue University (USA), Central European University (Hungary), Tianjin University (China) and FGV-EBAPE (Brazil). In 2016, Poets & Quants named him as one of the ‘Favorite Professors of the Best and Brightest EMBAs’.